Labour tax plan 'creates cliff edge for high earners'

Labour’s plans to scrap tax relief on pensions savings for top earners would create a “cliff edge” for people on £150,000 salaries, a financial expert warned today.

Paul Johnson of the Institute for Fiscal Studies said people could lose an extra £10,000 at a stroke as soon as they hit the top tax band.

“You could, in principle, earn £1 more and be £10,000 worse off,” he said after studying plans to raise £1 billion to provide guaranteed jobs for the long-term unemployed.

Shadow chancellor Ed Balls said the scheme would help 130,000 people who had been out of work for more than two years by offering them employment on at least the minimum wage.

However, the Tories unearthed a Labour call last year to use an almost identical squeeze on pensions tax relief to stop cuts in tax credits. “Ed Balls is trying to spend the same money twice,” said a Treasury source.

Shadow welfare spokesman Liam Byrne was forced to clarify that the party had “moved on” and was not committed to reversing cuts to tax credits.

“We said at the time that this is what we thought the Government should do… We also said that we couldn’t commit to reversing those changes when the Government had pushed them through,” he told Radio 4.

Labour’s new plans come ahead of a crunch Commons vote on Chancellor George Osborne’s call to cut many benefits in real terms.

Attempting to show Labour is not soft on welfare, Mr Balls said payments would be cut for any unemployed people who refused to take up jobs.

Writing for the PoliticsHome website, he said: “A One Nation approach to welfare reform means government has a responsibility to help people into work and support those who cannot, but those who can work must be required to take up jobs or lose benefits as a result — no ifs or buts.”

He added: “When times are tough it cannot be right that we subsidise the pension contributions of the top two per cent of earners at more than double the rate of people on average incomes paying the basic rate of tax.”

Those earning more than £150,000 would only get 20 per cent relief on savings for their retirement, rather than the maximum 50 per cent available now, which drops to 45 per cent per cent from April. It is one of the first tax policies confirmed by Labour, which has been coming under pressure to spell out its spending plans.